Should we scrap Kyoto?

The concept of environmental taxes dates back to 1920, when the British economist Arthur Cecil Pigou outlined the concept of “externality”: the impact upon an uninvolved party of any act of production or consumption. He described how hot cinders from steam locomotives could set fire to land alongside the railway tracks. Pigou suggested that a tax on such damage, imposed on the railway companies, would act as an incentive to stop cinders from escaping. This argument is the basis of the principle that the polluter should pay.

Forty years later another British economist, Ronald Coase, insisted it would be better to leave the market to itself since state intervention would generate transaction costs. The best economic result would be obtained if the victims of trackside fires negotiated directly with the railway companies, which could resolve the problem by owning the adjacent land themselves. The Coase Theorem states that the assignment of rights is economically meaningless: it is unhelpful for the owner of the adjacent land to have a right not to be the victim of fires, or for the company to have the right to cause them.

Nevertheless, in 1970 the US government responded to chronic atmospheric pollution by extending an earlier Clean Air Act to impose strict limits. Two years later the Club of Rome, a global think tank, published a report, “The Limits to Growth”. that warned of a catastrophic future if the human race failed to take account of the environmental dimension. A correlation was suggested between the concentration of CO2 in the atmosphere and climate change; discussions on the greenhouse effect became increasingly common.

But when US industry failed to respect the Clean Air Act, the government reacted by weakening the act’s provisions. In 1990 it introduced a system of emissions trading that fixed targets for reducing the sulphur dioxide (SO2) emissions that are responsible for acid rain. This initially awarded 110 (...)

(6) The difference between 5.2 and 4.8 is 0.4. An 0·4% reduction applied to 40% of emissions is 0.4 x (40 ÷ 100), which makes 0.16 of worldwide greenhouse gas emissions.

(7) Annex B lists states that have made reduction commitments; it relates only to countries from the Organisation of Economic Cooperation and Development (OECD), and east European countries in “transition to a market economy”.

(8) The Kyoto Protocol targets six greenhouse gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). Since CO2 is the most significant contributor to the greenhouse effect it has been made the unit of reference, and emissions of the other five gases are expressed as CO2 equivalents.

(9) In a forward transaction, money does not actually change hands until some agreed future date, at an exchange rate agreed now.

(10) At the end of July 2007 the World Bank was managing 11 carbon funds worth a total of $2.23bn. The average contribution of governments is about 50%.